The Fed Wants to Unleash a BIG QE 2 Program… But CAN It?

Phoenix Capital Research's picture

Last Friday
I wondered aloud if perhaps China and the US had struck a “backroom” deal
regarding their roles in the ongoing “currency wars.”


My primary
reason for wondering this stemmed from a dramatic change in Treasury Secretary
Tim Geithner’s rhetoric concerning the US Dollar, combined with China’s sudden
decision to raise interest rates.


After all,
the US had been branding China a currency manipulator and blaming it for the
former’s financial and economic woes for months. China, in turn, had responded
by lowering the rate of its purchases of Treasuries, charging that the US Fed
was damaging global balances and issuing veiled threats that it might consider
the “nuclear” option of actively dumping US debt.


In this
context, the sudden change in Geithner’s rhetoric, combined with China’s move
to raise interest rates, marks a MASSIVE change in monetary posturing. It is,
in a sense, a 180 on the US’s part combined with an “actions speak louder than
words” move on China’s part.


Seeing these
two developments, I couldn’t help but wonder if the world’s two super powers
(one on the decline, the other on the rise) had struck a “backroom” deal on
currency issues: the US to stop demonizing China while destroying its own
currency and China to make monetary gesture signifying it won’t continue to
“manipulate” its currency lower (yes I know the two currencies are pegged, but
China’s move is a gesture towards
strengthening the Yuan).


Of course,
this is mere conjecture... for now However, given how lopsided the “inflation
trade” is and given just how much this latest stock market rally has been
fueled by expectations of the US Federal Reserve announcing an enormous ($1
trillion+) QE 2 Program at its November 3 meeting, these developments could
have a MAJOR impact going forward.


Indeed, this
change in China/ US rhetoric provides a new, totally non-discounted backdrop to
the market’s expectations of a QE 2 program from the US Federal Reserve.
Everyone assumes the Fed WILL announce a massive program. But in light of these
recent developments, I wonder if it actually CAN.


that over the weekend the G20 meeting saw Germany, India, and China all
blasting US monetary policies for creating bubbles and damaging global trade
balances. We’re already seen hints of trade wars between China and the US with
rare earth elements. And we’ve also seen a currency war break out globally with
Brazil, Colombia, Peru, Russia, South Korea, Serbia, Romania, Switzerland, and
Thailand all actively intervening in the currency markets.


This last
point is key as it indicates foreign powers are more than willing to engage in
outright intervention in order to fight the Fed’s anti-Dollar policy (cheaper
Dollars means appreciation in foreign currencies, which in turn squeeze
exporting margins). In this context we have to seriously ask, CAN the Fed
really announce a MASSIVE QE 2 program?

After all, if the Fed DOES announce such a program, then we are undoubtedly
heading into outright trade wars, tariffs, and even MORE currency intervention.True,
Bernanke has ultimately got his sights set on destroying the US Dollar. But
with global tensions growing, he’s got to walk a fine line between saving Wall
Street and pissing off the US’s biggest creditor (and the only country that
still owns more US debt than the Fed).


However, if
the Fed DOESN’T announce ANY QE 2, then we are likely heading into a Crash for
stocks. Remember, the only thing that kept us above 1,000 on the S&P 500 in
July (and that caused stocks to rally from mid-August onward) was hints and
promises of more liquidity and hopes of more QE. If the market is disappointed
by NO QE 2 announcement, then we are wiping out the 12+% rally from September
in short order and likely heading to 1,000 on the S&P 500.


neither of these options is too appealing for the Fed. So it seems to me that
the most likely outcome is more “half measures” similar to the current QE lite
program which involves the Fed buying US debt WITHOUT (supposedly) printing
money to do it.


Thus, I expect that the Fed’s November 3
meeting will unveil something along these lines: a program that involves the
Fed buying more US debt in a way that doesn’t piss off the US’s creditor nations
or the US populace too much.


A good
example would be for the Fed to announce another $100-200 billion or so in debt
purchases (a decent amount but not nearly the HUGE amount the stock market
expects). The Fed could always sugar coat this disappointment with promises of
additional stimulus if needed so as to mitigate the damage to stocks.


My primary
point is this: the Fed WANTS to announce a large QE 2 program. But it might NOT
be able to do this without rocking the global monetary boat too much.
Consequently, we may be approaching a fantastic trading opportunity to the
downside after the Fed’s November 3 meeting. The market has already priced in a
massive QE 2 program. So any disappointment could result in a sharp reversal
and correction.







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gwar5's picture

So much has been baked into the cake already rhetorically. Talk only works so much by manipulating expectations.

But now they're backed into a corner to do something, but too little or too much will roil markets. The entire  economic team is in shambles and it's just Uncle Ben against the world. Timmy doesn't count.

Where's Stiglitz? Did the official socialist economist abdicate or what? Is that why Krugman is carrying the flag?

Silversinner's picture

To QE2 or not to QE2,that's the question for me and you.

But not for the boys on top,they already know and placed

their bets accordenly.

Revolution_starts_now's picture

If the Fed does a large QE2, it will become a fire hazard. People will be ready to burn it down. That's not how a confidence man runs a ponzi scheme. To run a major league ponzi, you get out and talk big shit about QE2, you get the market to really eat it up and move ahead of the event. Meanwhile you and your buddies position short, unloading inventory like a trash truck at the dump.

When we get to the event, things are better, or offset with reverse repos, market tanks banks makes money. Rinse repeat.

Lucius Cornelius Sulla's picture

However, if the Fed DOESN’T announce ANY QE 2, then we are likely heading into a Crash for stocks.

When was supporting price levels in the stock market added to the FED mandate?

cocoablini's picture

The establishment wants to reflate asset values like holding the door open for your buddies. Once they get through, deflation will snap back and the rich have had their wealth reestablished with the FED's help.
Can you imagine having a billion dollars of cash, gold and liquid assets in a DEFLATION? The rich have been spared the disaster with the on-the-taxpayer reflation of their ill-gotten assets.
We all have to remember that when we are long dead, the rich MUST carry on their legacy and the BANKING system must be the vehicle to retain and store this wealth. The wealthy have been buying gold bullion, hoarding cash(as usual) and in general frontrunning all decisions by the FED. They will survive. We may not be so lucky

RecoveringDebtJunkie's picture

There's another reason why the Fed may not print any more money via QE2 - the power elites want mild deflation rather than inflation.

CHS points out that, in an evironment of low/negative GDP growth and returns on assets, inflation will hurt the people with the most cash who cannot offset the loss in purchasing power with returns on investments, as they have been able to do for decades. Therefore, a manageable deflation will help financial elites increase their purchasing power and get higher real interest rates on debt owed to them.

Of course, I think our deflation will be anything but mild like Japan's was... so the power elites may be in for a rude awakening.

Grand Supercycle's picture

DOW weekly chart shows the rising wedge contained within the megaphone pattern. This remains a very bearish picture and we should
get a breakout soon.

Widowmaker's picture

Why Americans want to do business with gooks that oppress and poison their own people for a buck is beyond me.   Wait, no it isn't -- America loves oppression, poisoning it's youth and putting them in harms way for a buck, too!

SheepDog-One's picture

Yea really, whats the big difference between China and US right now? Not a hell of a lot.

AnAnonymous's picture

China is oppressive to one billion people on Earth and the US to six billions minus 300 millions people?

Still a long way to go for China to match the US excellence.

sschu's picture

The Fed has to deal with 3 issues IMHO: 

1. Jobs

 The employment picture is bleak and not improving.  The politicians are telling Bennie to fix it or we start auditing the Fed.  They both need a bogeyman, China gets the nod, and perhaps deservedly so.  Since China pegs to the dollar, and seems unwilling to open their markets, the response to their mercantilist ways is to print and devalue dollars.


2. Asset Prices   

 Major deflation in asset prices such as housing and stocks would be catastrophic for the US economy.  So many state & local government entities are dependent on property taxes to sustain their budgets.  It their property tax revenue streams decline significantly, they can no longer service the debt, hence the muni bond market collapses.

Pension funds are deeply invested in the stock market.  The same story, if stocks tank, these pension funds are (more) underwater and Americans cannot retire.  Since the political climate today is to backstop these committments, Bennie sees inflating the price of financial assets as pennies on the dollar.


3. Interest Rates

Even small amounts of increase in interest rates would be a disaster for the US.  The financial guys (PIMCO) can not have their portfolios crash if rates rise.  An increase in rates would be bad news for large debtors like the Federal government.  Housing prices would decline if rates go up.  Rates CANNOT go up.


All this points to a nimble Fed ready to intervene wherever required to keep these economic parameters within limits.  They will do whatever to make sure they have the tools required.  Does this mean $1.5T in QEII?  maybe, but maybe not.  There is little political will for a"big-bang" type approach, the Stimuli and TARP have been political disasters, so it is unlikely we will see such an announcement.

What is does mean is a stagnant US economy, increasing world wide trade tensions and eventually protectionism and higher input prices for oil and commodities.  The efforts vs China will maintain the status quo, things will not get better, they just will not get any worse. 

So the result of all this is the middle class is destroyed because as many have previously said, wages are stagnant, jobs are scarce and prices are higher.  The cost for things we want go down (electronics), prices for things we need go up (food, oil) and our wealth is eroded by this inflation.

The big unknown is the "black swan" effect.  What happens if a geo-political event changes everything?






AnAnonymous's picture

China not opening their markets make me laugh everytime I read it.


This part of the world (not limited to China) is quite reluctant to open one sector of their market: the banking sector.

It is funny.


sschu's picture

China not opening their markets make me laugh everytime I read it.

You have posted previously to this effect.  My position is not whether either country is more or less protectionist.  The issue has now moved into the political and the US electorate will vote for those representatives who will work to address the huge economic imbalance between the US and China.  The people will not stand by anymore and watch their jobs and economy shipped to China.  

Hundreds of billions in balance of payment deficits and U6 at 17%+ are not compatible.  The risk how it gets fixed and the pain as a result.



huggy_in_london's picture

1.  Printing money does not create jobs.  Only production does that.

2.  You cannot have asset prices rise disproportionately to rises in productive output i.e. you can't fake price rises over the longer term.  The market will go to where the market wants to go.  Blowing up asset prices will not lead to higher demand for goods and services.  There is no future consumption to be brought forward!!  Personal balance sheets need to be repaired, not further indebted.

3.  I think that's utter rubbish (no offense).  No one is borrowing at low rates now (but savers have been raped by fed policy).  If market rates were to rise (and they surely will anyway if you keep printing money) then that is the clearing price for money.  The US is Japan.  Printing money really did nothing.  It's all left to fiscal policy now. 

I think they'll be looking to do the MINIMUM they can get away with without crashing the markets.  The market shoe-horned them into QE (not surprising really... bank revenues are low and the banksters have to get themselves paid somehow) and they have totally lost control of the amount and timing.

The reserve ccy being devalued does NOT help the US.  It helps everyone else (thank you Mr Bernanke) but not america.  Unlike any other country, whose trade deficit contracts when you devalue, in the US it actually deteriorates such is your desire for oil imports. Since trashing the USD merely pushes up the price of oil etc then all you see is a deteriorating trade balance for america.  Printing money is only effective in the limit, where it means you default.  The chinese will not sit back and watch you destroy their holdings. 



sschu's picture

No one is borrowing at low rates now

Agreed.  The issue is not borrowing, the issue is debt service and the value of those assets on the Fed books.  Increasing rates means higher percent of the Federal budget going towards debt service, that is bad.  Also, increasing rates implies that bonds holders lose.  With rates increasing, the losers are the Fed and Federal Government.  They have decided to download the pain to the middle class by creating a negative interest rate scenario.  The Fed wants inflation and low interest rates and will manipulate the markets to achieve this.

Since trashing the USD merely pushes up the price of oil etc then all you see is a deteriorating trade balance for america.  Printing money is only effective in the limit, where it means you default.  The chinese will not sit back and watch you destroy their holdings. 

Also agree, this is the risk that they face.  Input prices will by definition rise, especially oil.  At what point does $100+ oil affect the economy?  Do they have a political deal in place with the Saudis to keep oil around $80? 

The Chinese hand will be forced, whether right or wrong, they cannot continue to take every good paying job in the world.  So they decide, lose a big part their treasury investments or allow for balancing.  The balance of trade China enjoys is not politically feasible with 17% U6.


huggy_in_london's picture

well... to be fair... americans enjoyed greater lifestyle in the last 20 years at the expense of the chinese... that's about to reverse.

sschu's picture

... to be fair... americans enjoyed greater lifestyle in the last 20 years at the expense of the chinese

I do not disagree.  Most Americans are fair, but they perceive the trade relationship with China to be unfair, hence politicians will take advantage of this fear.

The true answer is for America to become more competitive: tort reform, taxes, regulation, fair wages and stronger moral foundation on the part of the people.  These are painful adjustments against powerfully entrenched special interests (bar association, big business, unions, bureaucrats, etc).  It is easier just to blame someone else.

We Americans will try everything else before doing the right thing - just as Churchill said.



AnAnonymous's picture

That is right. That QE2 announced by so many as certain, is endangered of being nothing more than a urban legend past November, 3th.

cocoablini's picture

Pomo is operating to save the political establishment. After the 2nd, the Fed may disappoint. It will be the last opportunity to get gold as the hyperinflation bugs dump positions and the dollar rises or at least bottoms out.
The US is a currency manipulator on par with China- why anyone listens to that turd polisher Geithner is beyond me

SheepDog-One's picture

RIGHT! Since Sept 1 when the DOW was barely clinging to 10,000, this has been all about market rally decoration for this election nonsense which hasnt had the desired effect of an Obama/Demonrat love-fest at all, really looks like the opposite.

Financial_Guardian_Angel's picture

+100 Dog. The desired effect has not occurred because of websites like this one. The truth is out there and the sheeple are wising up. They want a piece of the action too....

Stevm30's picture

Maybe the FED will announce the purchase of $1000 billion in treasuries from foreign central banks - makes other countries happy because they are getting bought (at "pre-money" valuations) and gives the FED the ability to push all kinds of liquidity out the door.

deadparrot's picture

The Fed can't give the markets everything they want. If the markets are too high, it makes it difficult to justify more stimulus. Bit of catch-22.

SheepDog-One's picture

Funny, now I see everyone talking about $1 trillion dollars? Since when? All the hype for 2 months has been some massive number closer to $5 trillion. Just yesterday GS said $4 trillion, and last month the IMF said Q/E needed to be $7 trillion. 

Sell the news HARD when Bernanke says 'We're keeping rates at 0 to infinity and standing by to do 'something'. Its all BS people.

SheepDog-One's picture

'The markets have already priced in a massive Q/E delivery'

Yes, so we're ALREADY looking at a huge 'sell the news' event even if as you say the Q/E is delivered. (BTW, whats this about $1 trillion? Wasnt the top of the hype numbers $7 trillion as suggested by the IMF?)

Anyway, when Ben says he's keeping rates low and economic data does not warrant further easing right now but theyre waiting and watching, he'll be watching a bubble market implode on itself.

wswarrior's picture

From the onsite of this debt crisis, when has the FED ever risked disappointing the markets.  It won't.  Everyday, there is a different FED governor talking up bond purchases and additional easing.  It's completely telegraphed.  There will be QEII, the only question left is the size and exactly what securities will be purchased.  Do you really think that the government is going to risk a 10% pullback in the markets ahead of the holiday season.  I think that everyone really underestimates the manipulation currently taking place in the equity markets.  The S&P has been up with 7 of the past 8 weeks, only dropping 2 points in the one down week.  The FED does not limit its intervention to only POMO, you could bet the farm on that.  For now, weak dollar, strong equities, that's it.  

Bananamerican's picture

Denninger says the FED precipitated '08 crash (WITHDREW liquidity) to spook people into bonds

Djirk's picture

NY FED sues BofA. BofA undereserved, FED injects liquidity....legally required QE?

steve from virginia's picture

It's all theater. Even w/o the QE and media noise the entire money 'management' trope is  a variation on 'Dancing Wid' the Starz'.

People seem surprise when I tell them that market participants act on their own without some sort of manipulative star council behind the scenes pulling strings.  After all, market moves are what pay speculators' bills.The foreign exchange market is huge. Currency speculators like nice things. Duh!

Dollar goes down this week and up next month. Treasuries go up this week and down next year. It's markets, they fluctuate!

ILikeBoats's picture

I predict that by January 2011 corporate dollars held overseas will start flowing back into the country, helped by passage of a law that grants a tax amnesty on repatriating those $$$ .  That is $1 T of stimulus right there.

SheepDog-One's picture

LOL, youre already projecting to Jan 2011? Try getting past Nov 2010 first. And you figure somehow all the 'corporate money' will come back here after taxes are dropped to -0-? I cant even figure out what it is youre talking about...USA ruined economy to be saved by a tax loophole? Dream on.

ILikeBoats's picture

Sorry for not being clear.  My point is that there are still bullets in the Fed gun.  They could use the repatriation as a way to prop up the USD, for example, while still doing QE into the face of that renewed dollar demand.  I am not saying it is a good idea, just that there is the possibility it will happen.

SheepDog-One's picture

Theres still bullets in the FED's gun HOW? In what form, imaginary dollars? I dont get where the FED has anything but a broken slingshot, can you elaborate how the FED has more weight to throw around at all?

Financial_Guardian_Angel's picture

It isn't exactly the FED that will do it, but the FED and Congress together. US companies that operate abroad have cash sitting there that is taxable if it comes back to the US. The tax rate is quite high and a deterrent to bringing that money back home and (theoretically) using it. If the Govies pass a tax amnesty allowing this $$ to come bac tax free, this is essentially a QE without printing money. This would be good for: 1.) the FED, as it would help keep it's balance sheet lower; 2.) big business as it's a tax break; 3.) the dollar as this is not inflationary by nature.

SheepDog-One's picture


Ive never heard Bernanke or any other official Mention Q/E2 at all, the media did though. 

Where is there any evidence at all that Bernanke intends to, or will print trillions more in QE and shower banks and markets with it? 


Meatier Shower's picture

Bernanke did say that as a student of the Great Depression he will do whatever he has to in order to prevent deflation, and that a small amount of inflation is needed to grow the economy.

SheepDog-One's picture

Right, but aside from Bernanke actualy designing and guaranteeing we're in a depression that cant be gotten out of (see 'New World Order 1 world govt 1 world currency), when has Bernanke sworn to deliver $4-$5 trillion Q/E2 as has been jawboned for 2 months by the banks and media at EVERY piece of bad news to drive the markets ever higher?

Whats going to happen Nov 3 when Bernanke says 'Upon further review, economic data suggests we keep rates at 0 to infinity again and stand by in case we need to 'do something' as he will?

Bananamerican's picture

New World Order?

No Fucking Way

SheepDog-One's picture

Well dont ignore the direct comments from the UN and IMF themselves TOO much, saying the formation of a 1 world govt is behind schedule.

Meatier Shower's picture

Since it appears that QE2 has already been priced into the DOW, it will probably drop below 10,000 again.


Bernanke keeps saying he will keep interest rates low.

How can he do this other than by buying up Treasuries at near face value?

Isn't that QE?


SheepDog-One's picture

Thats what theyve already been doing for months. But you know the expectation is delivery of a warehouse stacked to the rafters with $4 Trillion to be showered on the banks and markets....where have you heard any official say thats their plan?


Thanks. My son and I are in disagreement about future federal government policy. I think the federal government will totally bail out state and local governments which of course will mean yet more electronic money printing. My son says the federalies will take only token steps in this direction and basically tell the states and cities to get stuffed. I said such a no-bail policy will lead to massive riots and my son agreed but said the federalies would welcome such events as an excuse to establish an out and out police state. I would like to know what you think about this.  

DosZap's picture

 IF IT it plays out as you say,

I agree with your son, except for it will be far worse than riots.

Martial Law will do nothing.Just make things much worse.

Americans are ARMED to the teeth, this will be a war against the Government.(not the one we were given).

There are not enough military to even begin to stop a  major civilain takeover of this Gov't.

Hell, we have fought Iraq,and Afghanistan for years, against far fewer numbers, and look at the outcome thus far.(try urban warfare against your relatives.)

Plus the Military are US,they have families,they are our brothers and sisters,aunts and uncles,Dad's and Mom's, they take an oath, to protect and defend the Const of the US.

FIRST,if they see it being crushed, they either stand down, and let the Founders intent be carried out, or they join the public.

The Founders saw to that.

 Sadly, we are so close to this starting already, it will be a "small" thing to push it over the edge.


SheepDog-One's picture

Behind the scenes theyre working towards the goal of 1 world govt and 1 currency, I think theyre right at the point where they can implode everything and do it now. They dont care about millions of dead people, in fact they'd like it and state population reduction is also part of their plan so this american idea that the govt cares about the people is out the window. I expect diabolical events from behind the curtain soon.

DosZap's picture


"They dont care about millions of dead people, in fact they'd like it and state population reduction is also part of their plan so this american idea that the govt cares about the people is out the window."

THEY will care when they realize they will be the first in line to be in those millions.


SheepDog-One's picture

All hype, exactly WHO except the media has ever mentioned Q/E2? Ive heard Bernanke say theyre standing by to 'act', but other than that can anyone point to any OFFICIAL who has discussed Q/E2 and given any details about it?

tired_of_manipulation's picture

It's not just the international situation - depending on the form it takes any additional QE could be seen as a bailout of the banks.  The timing of the the latest bombshells from the mortgage fraud fiasco is interesting, because politically it makes it much harder to do QE.  Not saying it won't happen, but I'm definitely leaning towards it being smaller.

Everyone here is talking about the effect on QE on stocks, but stocks are a pimple to the bond market's elephant.  Treasuries amd MBS will be hammered if QE is too small, I would expect that most of the recent buyers of these have been front-running the Fed. 

My guess is the Fed will try to do it 'just right' - a 'small' amount of QE with continued promised of more as necessary to try an minimize the impact all the way around.  If the bond market calls Bernanke's bluff and tanks, the outcry against more QE perceived as bailing out the banks will be even more after another leg down -- the noose is slowly tightening and closing off the option of endless printing.  If this weren't a bluff, the printing would already be astronimical, way beyond POMO.  And if the other guy is bluffing, you know he holds a weak hand.

Risk on only works in a low interest rate environment, and I believe we are about to see that end...